China, Spain Help Risk Near Key Support

The hope for more money printing allowed a key market ratio to hold at a bullish
support zone Thursday. Using a familiar script, global markets shot higher
primarily based on (A) news related to government debt, and (B) speculation
that more stimulus is on the way. From The Sydney
Morning Herald:

Stocks advanced and the euro recovered from two-week lows on Thursday
after the Spanish government said it would cut spending sharply and speculation
grew that China will act to support economic growth. Spain's Deputy Prime
Minister Soraya Saenz de Santamaria announced a timetable for economic
reforms and a tough 2013 budget focused on spending cuts rather than tax
increases as the country continues to negotiate a possible European aid
package to ease high borrowing costs.

If you follow our work, you know we have been concerned about weakness on
numerous intermarket charts. One of the risk-on vs. risk-off ratios we track
is the performance of the S&P 500 relative to intermediate-term Treasury
bonds (IEF). When the ratio is rising, stocks are performing well relative
to bonds (see chart below). This week, the ratio is trying to make a stand
(see point A). The intersection of numerous trendlines could act as support
for stocks relative to bonds. The last four times the ratio held at support,
it marked a good entry point for stocks (see 1-4 below). The S&P 500 is
shown as a point of reference.

The pattern has been to buy risk at support (where the ratio hits the blue
trendlines). At some point the pattern will be broken, but for now it remains
intact. We did redeploy some of our cash today into emerging markets (EEM)
based partly on the chart above. The chart above is a weekly chart, which means
where it finishes the week is much more important than Thursday's close. Friday
is a big day for risk.

Chris Ciovacco is the Chief Investment Officer for Ciovacco
Capital Management, LLC. More on the web at www.ciovaccocapital.com.

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